The Best Value for America’s Energy Dollar: A National Review of the Cost of Utility Energy Efficiency Programs Maggie Molina March 2014 Report Number U1402 © American Council for an Energy-Efficient Economy 529 14th Street NW, Suite 600, Washington, DC 20045 Phone: (202) 507-4000 Twitter: @ACEEEDC Facebook.com/myACEEE www.aceee.org BEST VALUE FOR AMERICA’S ENERGY DOLLAR © ACEEE Contents Acknowledgments ............................................................................................................................... ii Executive Summary ........................................................................................................................ iiiii Introduction .......................................................................................................................................... 1 Measuring Cost Effectiveness: Practices and Challenges .............................................................. 3 Energy Efficiency Costs .................................................................................................................. 3 Evaluation, Measurement, and Verification (EM&V) of Energy Savings ............................... 5 Levelized Costs Versus First-Year Costs...................................................................................... 7 Cost-Effectiveness Tests ................................................................................................................. 8 Energy Efficiency Valuation in Integrated Resource Planning ................................................ 9 Methodology ...................................................................................................................................... 10 Data Collection and Processing ................................................................................................... 10 Challenges and Caveats ............................................................................................................... 12 Calculations and Assumptions ................................................................................................... 15 Results ................................................................................................................................................. 17 Electricity ........................................................................................................................................ 17 Natural Gas .................................................................................................................................... 30 Discussion and Recommendations ................................................................................................. 34 Energy Efficiency Costs Compared to Supply-Side Options .................................................. 34 Consistency and Transparency in Energy Efficiency Reporting ............................................ 37 Further Research ........................................................................................................................... 39 Conclusion .......................................................................................................................................... 39 References ........................................................................................................................................... 41 Appendix A. Data Sources by State and Program Administrator.............................................. 43 i BEST VALUE FOR AMERICA’S ENERGY DOLLAR © ACEEE Acknowledgments Thank you to ACEEE’s funders for supporting this work. Many individuals at state utility commissions and utilities as well as non-program administrators were invaluable in sending data and answering questions about the data. Thank you to colleagues at ACEEE who reviewed an earlier draft of this report: Jim Barrett, Annie Downs, Neal Elliott, Marty Kushler, Steve Nadel, Max Neubauer, and Dan York; and thank you to the following individuals who reviewed a draft of the report and provided comments: Megan Billingsley (Lawrence Berkeley National Laboratory), Joe Bryson (U.S. Environmental Protection Agency), Tom Eckman (Northwest Power and Conservation Council), Nick Mark (Centerpoint Energy), Cecily McChalicher (Northeast Energy Efficiency Partnerships, NEEP), Jen Miller (Sierra Club), Chris Neme (Energy Futures Group), Wally Nixon (Arkansas Public Service Commission), and Kenji Takahashi (Synapse Energy Economics). Finally, thank you to the following individuals who helped with the editing, production, and communications for this report: from ACEEE, Fred Grossberg, Patrick Kiker, Eric Schwass, and Glee Murray, and from Resource Media, Debbie Slobe. ii BEST VALUE FOR AMERICA’S ENERGY DOLLAR © ACEEE Executive Summary After a decades-long history, U.S. energy efficiency programs have expanded rapidly in recent years. As program administrators face rising energy efficiency targets that require more comprehensive portfolios, they have an increasing concern about the impact on program costs. This creates the need for high-quality, comprehensive, and consistent data metrics on energy efficiency program costs and cost effectiveness. To this end, the American Council for an Energy-Efficient Economy (ACEEE) has undertaken an assessment of utility- sector energy efficiency program costs and cost effectiveness in 2009-2012. The results of our analysis clearly demonstrate that energy efficiency programs are holding steady as the least-cost energy resource option that provides the best value for America’s energy dollar. Data from a large number of diverse jurisdictions across the nation show that energy efficiency has remained the lowest-cost resource even as the amount of energy efficiency being captured has increased significantly. At an average cost of 2.8 cents per kilowatt hour (kWh), electricity efficiency programs are one half to one third the cost of alternative new electricity resource options such as building new power plants. Natural gas energy efficiency programs also remain a least-cost option at an average cost of 35 cents per therm as compared to the national average natural gas commodity price of 49 cents per therm in 2013. In addition, both electricity and natural gas efficiency costs have remained consistent over the past decade. This consistency shows the reliability of efficiency as a long- term resource. METHODOLOGY The goal of the current ACEEE analysis is to collect and aggregate recent data on energy efficiency program costs and cost effectiveness from jurisdictions across the United States. Our focus is on the costs to utilities or other program administrators to run efficiency programs, but we also include some data on the broader costs and benefits to participants and to society. We do not aim to compare one state’s efficiency portfolio results to others, but instead to present overall results. We collected data for 20 states for electricity programs and 10 states for natural gas efficiency programs from 2009 to 2012, pulling from utilities’ and other program administrators’ program results. We collected the necessary data (annual program costs, net energy savings, and measure lifetime) to calculate the levelized utility cost of saved energy (CSE). By levelized we mean that upfront costs are amortized over the lifetime of a measure at an assumed real discount rate. The levelized CSE is the best measure for comparing energy efficiency to other energy resource options. Our definition of utility energy efficiency costs includes Direct program costs incurred by administrators, including incentives to participants and all non-incentive costs such as the direct installation of measures, program design and administration, marketing, education, and evaluation Shareholder incentives or performance fees, which reflect the rate of return utilities earn in some states to meet or exceed certain thresholds of energy savings levels iii BEST VALUE FOR AMERICA’S ENERGY DOLLAR © ACEEE We also collected some data on participant costs; however these data are much more sparsely reported and therefore the data set includes only seven states. Our task of data collection and comparison was complicated by numerous challenges, including inconsistent reporting formats, nomenclature, and frequency; variation in energy savings evaluation approaches and in the accounting of demand response programs; and structural differences in program portfolios. We tried to make the data as consistent as possible in the face of these challenges. We consistently calculated the CSE based on a 5% real discount rate, we used net energy savings values and measure lifetimes as reported by the program administrator, and we used energy savings reported at the meter rather than at generation. We converted all data to real 2011 dollars. RESULTS As shown in figure S1, the CSE for electricity energy efficiency programs ranged from $0.013 to $0.056 per kWh across the 20 states from 2009 to 2012. Figure S1. Electricity energy efficiency program CSE by year. Each dot represents average costs for each state in a given year. 2011$ per levelized net kWh at meter. Assumes 5% real discount rate. We calculated four-year averages (2009-2012) for each of the 20 jurisdictions (and 10 jurisdictions for gas programs), and display the average, median, minimum, and maximum for the dataset in table S1. The simple average utility CSE was $0.028 per kWh for electricity programs and $0.35 per therm for gas programs. iv BEST VALUE FOR AMERICA’S ENERGY DOLLAR © ACEEE Table S1. Summary